Moscow, Kiev Head Toward Gas Impasse

Russia Threatens to Halt Sales to Ukraine Over Debt, Jeopardizing Flow to Europe

MOSCOW, Dec. 23 -- Russia and Ukraine appear to be heading for a new collision over natural gas that could disrupt supplies to Europe this winter, with Russia threatening to stop selling the fuel to Ukraine on Jan. 1 if it does not repay more than $2 billion in debt.

Russia called on European nations Tuesday to pressure Ukraine to guarantee the delivery of Russian natural gas to the continent. The appeal, made by Energy Minister Sergei Shmatko, came as negotiators prepared to meet in Moscow in an attempt to resolve the politically tinged standoff.

Russia briefly reduced its supply of gas to Ukraine in March and shut it down for a few days in January 2006. But the latest disagreement could be more severe because the global financial crisis has battered both countries and left them hungry for funds.

Any disruption could affect Europe because Russia supplies as much as a quarter of the gas the continent uses, most of it delivered through pipelines in Ukraine. Analysts say Ukraine could divert gas intended for Europe to satisfy its own needs if Moscow carries out its threat to shut off the supply to Ukraine.

"Europe must be concerned by the decisions made by Ukraine," not by Russia, Shmatko said at a news conference. "Russia will ship and export gas in quantities stipulated in our agreements."

He added that Europe should "exert required pressure" to ensure "guaranteed gas transit."

Russia's state-controlled gas monopoly, Gazprom, set the Jan. 1 deadline for payment of Ukraine's gas debts at a news conference last week, saying Ukrainian officials had informed the company they could not raise any more funds for gas for the rest of the year.

But Ukrainian President Viktor Yushchenko said the country had already paid Russia for gas consumed in the summer and autumn, and the national gas company, Naftogaz, said additional payments were planned.

The dispute arose in negotiations over a new gas contract between Russia and Ukraine. Moscow is trying to raise prices after more than a decade of charging subsidized rates. Ukraine has resisted the increase, asking Russia to pay more for using its pipelines and offering to let Gazprom sell directly to Ukrainian consumers.

The Russian demand for payment comes as Ukraine is struggling to avoid a financial meltdown, with the value of its currency plunging and its vital steel industry laying off thousands of workers. The International Monetary Fund and other funding sources have already granted Ukraine a $16.5 billion emergency loan.

Some politicians in Kiev have accused Moscow of trying to exploit the crisis to force Ukraine to surrender control of its pipelines and to weaken its fractious, Western-leaning government. But others say that Gazprom is struggling to survive the crisis too and that it is worried that its other customers will follow Ukraine and seek to defer payment of their bills.

Viktor Zubkov, Gazprom's chairman and a deputy prime minister, formally notified European leaders on Monday of possible delivery disruptions because of the dispute with Ukraine. He said that Gazprom had offered to pay Ukraine in advance for the use of its pipelines so it could have the funds to cover its debts but that Ukraine declined.

A senior Ukrainian official, Oleksandr Shlapak, said Ukraine had guaranteed delivery of Russian gas to Europe, adding that it had enough in underground facilities to last through the first part of the new year even if Russia cut off supplies.

"Ukraine will not steal anyone's gas starting in the new year," he told the Interfax news agency. He added that Russia was unfairly insisting on prices that did not reflect the impact of the financial crisis, which has resulted in a sharp drop in the price of oil.

Addressing a meeting of gas-exporting nations in Moscow, Russian Prime Minister Vladimir Putin said that the crisis would hit the gas industry harder than other energy sectors but argued that the price of natural gas should rise as a result.

"Costs of exploration, gas production and transportation are going up. It means the industry's development costs will skyrocket," he said. "The time of cheap energy resources, cheap gas, is surely coming to an end."